Geo Political Tensions and Consequences

The geo political tensions spilled over yesterday in what appears to be an act of stupidity rather than an act of war, with yesterday’s plane tragedy, and the loss of 298 souls. However, we believe this will be seen more as a human tragedy more than a geo-political crisis of long duration. The act will also turn the world’s eyes and pressure onto Putin to try and resolve the issues quickly before it escalates.

Therefore while uncertainty may dominate the region, the spill over in the rest of the world should be limited.

While we believe a diplomatic solution will be found, Russia’s ability to say it is only protecting Russian’s within East Ukraine are now something of a sideshow. The truth is that Ukraine borders both the EU and Russia and that the population seems split about with whom to build future links and allegiances and the importance of Ukraine as a conduit that transports Russian gas to the rest of Europe will continue to dominate the argument. The truth is that this horrible disaster will probably raise the stakes high enough to ensure a path will be found to a solution.

Previous commentary and advice to OCM from Economic experts is that the direct exposure of the West to the Ukraine is only marginal (about 0.2% of global GDP). Finland appears the most exposed, but on this basis, Italy has as much to worry about as Germany (as does China). The bigger concern for European countries may be energy security supplies (20% of Europe’s gas transits through Ukraine). The UK has no gas from Ukraine as all of ours comes from Norway. When we look at the interdependence on Russian gas (as a percent of total energy consumption) Italy, Austria and Finland are the most vulnerable among Western European countries, with a dependency ratio of 10%, while for Germany it is 8% (it is zero for the UK and Spain).

From an equity-market perspective, apart from the tensions earlier this year, we have little to inform us as to how markets could react. However, the 1998 ruble crisis may help and if we look at that and how various stock markets performed from a month prior to the devaluation through the end of the year. Not surprisingly, the US and UK markets were the least impacted, whereas the German and Austrian markets suffered the most durable effects. A similar pattern may build up again. A prolonged disruption of Russian energy flows could cause real damage to Europe, but the Russians also have a lot to lose by such an outcome (natural gas and crude oil have accounted for 45-50% of Russian exports over the last 10 years). Such a scenario is not in the interest of either side.

We therefore believe that the tensions will not last long and the disaster will increase pressure to resolve the Ukraine crisis. As far as Israel is concerned that is a constant and will flare up and die down for many generations until a long term solution is found.

Therefore from OCM, we pray for the families of the lost souls but do not feel at this stage that we should make any alterations to be defensive in client portfolios. As always though we watch!

If anyone is concerned and wants to talk to us please contact us direct on 01604 238 880.

Have a lovely weekend.

Jason